I've met with tax advisors for the last 8 years over this issue. We've been exploring between LLC and S-Corp entities.
There have really been no clear tax advantages as of yet -- although with the growth of my business we may make a move soon. However, my company is in its 10th year, and we remain a sole proprietorship.
I should mention that the "protections" supposedly afforded by incorporation were not all that motivating since we have several partner relationships that require us to maintain high levels of GL and E&O insurance.
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My company is formed as a LLC. No real tax benefit but there is a huge liability benefit. As a sole proprietor, if your business is sued they can come after your personal assets. To me this is a no brainer. Pay $250 to form an LLC or risk having somebody take my house, savings, cars, etc. Some of the contracts my company has to sign are pretty scarry, I feel alot better signing them in my LLC's name.
Over the years, I've had a sole proprietorship that evolved into a partnership. Also, a S-Corp, and now, a LLC.
Of those different entities, I'd recommend the LLC if you're a small business or a start-up. On the plus side, it's inexpensive to set up and it does provide protections similar to a S-Corp. The tax issue is a wash (unless you're considering a more cumbersome and expensive C-Corp). Also, administratively, a LLC's requirements are much simpler than a S-Corp.
On the negative side, it's a bit different when dealing with ownership "shares" and it's a relatively new entity. So the laws, case law, and interstate recognition factors aren't as mature.
Another thing for startups and consultants to consider is marketing-related ... the image an "official" entity presents.